In this article I would like to touch another angle that almost got forgotten in the last couple of months although it's more valid than ever before: The possibility of Israel attacking Iran.

The main purpose of this article is to identify "win-win situation" companies, stocks that investors should be happy to hold in good times as well as - and possibly in light of - bad times. In more simple words, I'm looking for stocks that comply with the following criteria:

They are worthwhile investing in TODAY regardless of whether Israel attacks Iran TOMORROW.

They are worthwhile investing in TODAY especially if Israel attacks Iran TOMORROW.

The odds of Israel attacking Iran are still low, in my opinion. Therefore, one shouldn't invest based on this low-probability outcome. Nevertheless, if we can pick up stocks that may outperform under both normal and extreme circumstances why wouldn't we?

It's a kind of "free lunch" that doesn't require any compensation or extra costs. At the same price you get your portfolio ready for the expected as well as for the unexpected.

During the first half of 2012 there were quite a lot of speculations whether Israel is going to do something ahead of the US elections. The perception was that the closer we get to the US elections (November 6th 2012) - the lower the odds of Israel taking any action against Iran.

While this equation turned out to be accurate I wish, in this article, to present the case - and probability - of Israel attacking Iran over the next 2.5-6 months, what may be the impacts of such attack on the world markets and how should any investor take into consideration such a scenario. Even if there's low probability for Israel to attack Iran alone there are ways to stay on the safe side. Therefore, if it makes sense financially, economically and even geo-politically why would anyone avoid taking the necessary steps? Many investors are quoting the famous "expect the unexpected" phrase but very few take real actions and actually prepare their portfolios for the unexpected. Do you???

During his speech in front of the UN General Assembly and despite a US refusal to set an ultimatum, the Israeli Prime Minister Benjamin Netanyahu drew his "red line" for Iran's nuclear program saying Tehran will be on the brink of a nuclear weapon in less than a year.

This was actually the first-time ever that Netanyahu - who has clashed with President Barack Obama over the urgency of military action against Iran - was citing a time frame and it was a final proof that Israel won't attack Iran before the US election.

More important than the "bullet-proof Elections" assurance was the cartoon-like drawing of a bomb with a fuse that was used by Netanyahu and on which he drew a red line just below a label reading "final stage" to a bomb, in which Iran was 90 percent along the path of having sufficient weapons-grade material.

Although in his speech, Netanyahu never explicitly said that if Iran crossed his red line, Israel would launch attacks against the Iranian nuclear facilities, he did seem to imply such a threat. Netanyahu predicts that Iran would reach this final stage around the spring or summer of 2013. He also believes that, faced with a clear red line, Iran will back down in a crisis that has sent jitters across the region and in financial markets.

Netanyahu's remarks were the closest he or any top Israeli official has come to publicly laying out precisely which Iranian actions could trigger an Israeli military strike on Tehran's nuclear infrastructure.

This is a key progress in understanding the possible outcome. Despite his party being the biggest party, the Likud-Beytenu only received 31 seats out of a total 120. This means that on one hand Netanyahu is the sole candidate to form a coalition but on the other hand he is not the master of his own faith. The most reasonable scenario at the moment seems like a center-right coalition that won't objects to attacking Iran, at least not fiercely as a center-left coalition would.

One of the main official reasons for this visit is to try and restarting the Israeli-Palestinian talks. Whether official or not, I'm positive that the Iranian issue would be discussed and I'm pretty sure that Netanyahu would like to sense whether Obama will lead, support or object an Israeli attack against Iran.

If Israel indeed going to do everything in its power to prevent a nuclear Iran. There are 3 possible scenarios:

1. TheUSAis leading an attack andIsraeldoes not get (directly) involved

Out of the 3 scenarios of an attack this is probably the most market-friendly scenario because a US-Iran is expected to be short and very decisive.

2. Israelis leading an attack and theUSsupport it (directly or indirectly)

This scenario is a bit tricky because there's much difference between a US direct to a US indirect involvement. For the sake of this article I define "involvement" as rhetoric and/or military support but not direct fighting against Iran. This will be a very sensitive situation because there may be various super-powers (Russia, China, Germany, EU) raising their voices and there would be a rhetoric world war that may lead to some unpleasant outcomes if and when words turn into actions.

3. Israelis attackingIranwith theUSstepping aside

I personally believe that this is the most remote scenarios of all. Although taking into consideration the economical and political situation in Iran it seems like Israel can take down Iran alone, Israel doesn't have the US military capabilities. Furthermore, if Israel will be on its own there may be other regional forces that would try to take advantage of the situation and delete Israel from the map.

It's very unlikely that the US will allow this to happen but is as unlikely that Israel will take the chance…

If president Obama ever provides Prime Minister Netanyahu with the required assurances, i.e. that the US back-up Israel (one way or another) should Israel decides to attack Iran, that, in my opinion, would give a big boost to the pro-attack probability. If next month (during his visit to Israel), or at anytime then after, Obama is going to tell Netanyahu "I won't lead it myself, but I don't object you leading it" I believe that it won't take much more for Netanyahu to cross the Rubicon

Obviously this article could go on and on about potential scenarios, military capabilities, and the tragic loss of life that might occur. But this article is about your money and ideas that could help protect it from the events that might occur. That being the case, let's dive in and look at what might happen if Israel does strike and how you could protect your current investments.

An Israeli strike on Iranian nuclear facilities would not be a single day event as was done against the Iraqi Osirak reactor in 1981. The targets are just too far away, so Israel would have to attack over a series of days. The drama that would unfold would be worldwide news, and will stay as the top headlines for weeks. Needless to say, stock markets and exchanges around the world will most likely have very negative views and will sell off in varying degrees. The most critical event would be if Iran attempts to shut off the flow of oil through the Strait of Hormuz. Now if this were to happen, even for only a brief time, it would send tremors through the world's financial markets as oil prices would rise at a rapid rate.

The US May be Forced to Intervene

The probable results of Israel bombing Iran's nuclear sites would be oil and gold prices skyrocketing, the stock market could drop precipitously and Iran would almost certainly retaliate by sending missiles raining down on Israel, close the Straits of Hormuz and even attack oil tankers or US naval vessels, as they have threatened to do. 20% of the world's oil passes through the Straits of Hormuz, with the Japanese getting 65% of their oil-and the Chinese 50% of their oil-through these narrow waters.

If the Iranians did close the Straits of Hormuz or threaten international shipping or US naval vessels, the US would have to intervene. US naval power could neutralize Iranian naval power and nuclear production facilities with a sustained attack, but that attack could take several months to accomplish.

The problem is many analysts believe that if the Straits of Hormuz are effectively closed because of a military action for more than two months, high oil prices could completely wipe out the expected 2% to 2.5% of US GDP growth in 2013. This could cause a recession.

Investments Implication

While this article focus on the day when Israel attacks Iran when I'm preparing my portfolio to weather such a storm I wish to pick stocks that would outperform in case we won't need to face such an extreme case. In other words, I wish to pick stocks that would do well whether Israel attacks Iran, whether it doesn't.

Energy

The most immediate effect of an Israeli attack on Iran would be a spike in the price of oil, driving up the price of gasoline in the US to $5-$6 per gallon. Oil prices could go up during any conflict, at least for a short period of time, from $200 to $300 per barrel.

This would be very beneficial for export-leading countries such as Russia, Norway (ENOR, NORW) and Canada (NYSEARCA:EWC) as well as the obvious OIL, USO and USL.

Nevertheless, in light of possible involvement of several countries in the conflict, I prefer to stick to specific stocks. When I'm thinking about it, same goes to debt - I rather stick to a corporate debt than to a sovereign debt. Amongst my preferred energy stocks list you may find the following names:

The obvious picks are gold (NYSEARCA:GLD), Physical Gold (NYSEARCA:PHYS), silver (NYSEARCA:SLV) and Physical Silver Trust (NYSEARCA:PSLV). Personally, at this point of time in which gold and fold-miners are trading at year (or even multi year) lows, I rather hold into specific names such as Allied Nevada (NYSEMKT:ANV), Aurizon Mines (AZK), Barrick Gold (NYSE:ABX), the Central Fund of Canada (NYSEMKT:CEF), Goldcorp (NYSE:GG), Gold Fields Limited (NYSE:GFI), Kinross Gold (NYSE:KGC) and Pershing Gold (OTCQB:PGLC)

Commodities and commodities-related stocks

Rise oil prices will most probably push other commodities prices higher as well, either because of "sympathy" or because of real fears of shortages. The entire world transportation would suffer, mainly cargo vessels that would find it hard to deliver their goods on time. Leading names such as BHP Billiton (NYSE:BHP), Freeport-McMoRan (NYSE:FCX) and Potash Corporation (NYSE:POT) should outperform in such a scenario

Security and Defense

One of the sectors that would be a direct beneficiary of an Israel-Iran war is the security/defense sector. Stocks like Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Raytheon Company (NYSE:RTN) are the preferred candidates here

Spike in Volatility, Shoring the Market as a whole and/or Israel specifically

Since I believe that the market is poised for a correction I also expect volatility to spike higher. Needless to say that if Israel attacks Iran the fear index (VIX) would skyrocket. Therefore, I recommend going LONG the VXX, the TVIX for the more aggressive investors or SHORTING the XIV for those wishing to get LONG VOL from the short side

Those wishing to simply short the market can use the ProShares Short S&P500 (NYSEARCA:SH) ETF or the ProShares UltraShort S&P500 ETF for a double effect.

Alternatively, investors may wish to explore the opportunity to short leading Israeli stocks such as Check Point Software Technologies (NASDAQ:CHKP), Sodastream International (NASDAQ:SODA) or Teva Pharmaceutical Industries (NYSE:TEVA).

Inflation-linked or safer fixed-income instruments

Taking into consideration the current gloomy economic situation I'm definitely not a big believer of the bursting inflation just around the corner. The fed is printing money for 4 years already and it didn't happen; there's no reason to believe that it would start right here, right now. Nonetheless, inflation will burst at some point and in an attack scenario inflation would spike right away mainly due to soaring energy prices. Therefore, holding some US TIPS (NYSEARCA:TIP) right now doesn't seem like a bad idea.

I like fixed income and I'm a big believer in fixed income. Therefore, I don't find any harm in putting some money into Build America Bonds (NYSEARCA:BAB) or National Municipal Bonds (NYSEARCA:MUB). I like the higher-yielding, more aggressive plays such as Blackrock Kelso Capital (NASDAQ:BKCC), KKR Financial Holdings LLC (KFN) or Navios Maritime Partners LP (NYSE:NMM). These instruments, though equities by nature, are enjoying some very high dividend yields and therefore functioning as "semi convertible bonds" sort to speak. In times of great uncertainty can prove more resilient than "normal" instruments, whether equities or bonds.

In time of great uncertainty the US Treasury bonds and notes would rise and anyone wishing to take advantage of this should find a shelter at the iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) ETF

Other Industry Sectors That Could Be Affected

Insurance companies will most likely sustain losses and will refuse to insure any ships or oil tankers going into or out of the gulf during a military conflict exacerbating the high price of oil and for a while insurance rates will soar.

Higher gas prices could also drive up production costs for goods reliant on transportation, and more money spent at the pump means less spent at restaurants and movie theaters. Buying fewer goods and services tightens the economic vice and could have a negative effect on job creation.

Airlines stocks almost always decline during military conflicts and oil price shocks.

The conflict will also likely roil financial markets. If the conflict continues for several months the US could sustain long-term economic damage if oil prices stay over $5 per gallon. If the US economy sustains two quarters of economic decline we would technically enter into a recession.

Based on history, almost every war causes the stock markets to tumble. Depending on how long the conflict lasts; a drop of 15% to 20% would not be surprising.

With regard to how long the stock market will decline has everything to do with how long the conflict lasts.

The good news is that the stock market understands that this kind of military action is temporary and corrects itself very quickly once there is an end in sight, but if events are heading for escalation or a lengthy conflict, the market could keep dropping.

Conclusion

The best advice to investors is to not panic if you are a long-term investor. Military conflicts will get resolved and the stock market will most likely come back strongly as soon as it is over.

But if an investor wants to hedge his or her bets, in my opinion, they should be overweighting oil and gold in their portfolios to cushion the shocks that are almost certain to come.

You cannot turn on your television or surf the internet without being bombarded by news of the events in the Middle East involving Israel and Iran. These two countries have been adversaries for a long time, and saber rattling between the two has been a common occurrence over the years. All this has changed though with the recent introduction of Iran's possible development of nuclear weapons. Now the threats and posturing have taken on new meaning.

The concept here is rather simple in nature, but of course there are always risks to everything.

In investments, like in a war, you must have an exit strategy before you enter the field

Disclosure: I am long AZK, MMLP, SD, SDRL, WFT, VXX, TVIX, BKCC, KFN, NMM, SFY, OTCQB:PGLC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm also LONG and SHORT additional stocks that aren't mentioned in this article

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Author’s reply »
Thanks user877 for being my first instablog commentator! (who knows if and how many bother to read the instablog?...)It wasn't published because SA claimed that they had too many articles dealing with this subject.I checked this and this is BS. Not only that they don't but this one is the most relevant, most updated and written by an "insider" (I'm an Israeli, though living in London right now) so there is an added value.Finally, I touched upon events that only occurred very recently (so no one else could write about them before me) and this led me to the conclusion which says: IF Israel decide to attack Iran this year, as it "suppose" to be, the time frame for this (based on the Jewish calendar and its limitations) is mid-May till end of August.It's a low probability but still a probability that should be taken into consideration

Author’s reply »
giorgiolb,Thanks for commenting!This is what I was thinking. Nevertheless, if you look at it I didn't put into it anything that isn't a well-known fact and I avoided completely expressing personal, non-diplomatic, opinions.The truth is that the possibility of Israel attacking Iran is a MOST RELEVANT issue for investors and markets prospects. therefore, if the rejection was based on politics - that's a real shame.You are more than welcome to write to SA editors about it; if there will be few of you perhaps they'll reconsider.This article is still as relevant as on the day it was first rejected...

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